The future of cash

[Rangnath]

Interesting.  Will that happen "HERE"?  And where is "HERE" anyway? Do you see low denomination coins becoming obsolete in Europe?  If this happens in India, won't it eventually happen everywhere?

In the US, I think it safe to say that the program to bring dollar coins into circulation has failed once again.  Isn't it just a matter of time before the American penny goes the way of the one paisa?

Will we have a changeless planet by 2200?
richie

[Figleaf]

Difficult questions all...

Shortage of small coins is caused by the coin becoming obsolete as its value is too low. However, it will be obsolete to rich people before becoming worthless to poor people and there's the crux. The US cent is clearly obsolete, as it is easy to find them on the sidewalks, in the post offices and stations of NY.Is it also obsolete in the small villages of Mississippi or Alabama? Maybe. However, even though some states of the US qualify as developing countries, the US is a rich country in its totality, therefore the US solution is to strike millions of cents. These cents don't circulate much, as rich people will refuse them, throw them away or pile them up somewhere, but they may be used in the poorest parts of the US. In this way, the rich are helping the poor in a very small way.

Though India also has rich and poor areas, it is a poor country in its totality, so the US solution is not feasible. India's solution is apparently to strike insufficient quantities and wait if there's an outcry. If there is, they assign more coins to that region. Where there's no outcry, supply is choked off.

There is a similar situation in te EU, which has poor as well as rich countries, but since member states can decide themselves which coins to issue or not, the problem is mitigated. The EU solution is not to care if member states do or don't want the 1 and 2 cent pieces. Finland rounds prices, in the Netherlands you are allowed, but not obliged to round, others don't. Germans don't like the small change, but the Greeks need them and so will some new entrants.

Where I see cash disappear is rather on the high value side. The poorer member states insisted on the largest notes, while in the richer ones, large notes are often refused. As the payment system develops (personal checks in France, debit cards in most other countries) you need large value notes less and less.

Interestingly, systems for small payments fail. PayPal does work, but in a niche of the US market. It's way too expensive (4%!) for anything except forced use on eBay. Probably, you'll see banknotes disappear before coins.

Peter

[Figleaf]

Probably, you'll see banknotes disappear before coins.

I am surprised nobody challenged me on that

Here's some more thought. If banknotes are replaced by electronic money and plastic money, they will disappear first if coins can eat into the market share of small notes. The question than becomes, when is it economical to replace notes by coins? Suppose a note of 100 costs 1 to produce, but remains in circulation for two months. Suppose a coin of 100 costs 80 to produce, but remains in circulation for 20 years. Providing 100 of currency British usage) to the market would cost 6x1 = 6 in banknotes and 80/20 is 4 in coins. This primitive example shows a) that coins can be produced economically even when their cost is close to their face value and b) that the "coin or note" question hinges on production cost and lifetime. (this doesn't take politics and lobbying into account)

Production cost for notes are mainly salaries and machinery. Production cost for coins are mainly salaries, machinery and metal cost. I speculate that metal cost will come down as we find more and better artificial materials and new uses for old materials (e.g. ceramics). That means that the cost of coins relative to notes will come down s we ought to be seeing higher value coins.

Lifetime will depend on wear, which in turn depends on the speed with which money moves through the economic system (Velocity). We know that through time velocity slowly decreases. However, since paper is much more sensitive to wear by velocity than metal, that should be an advantage to notes. As we use more electronic transfers for higher payments, velocity should decrease even more.

So what will win in he end? If production cost effects win, we'll still be working with coins for a long time. If velocity effects win, coins will follow the dodo into oblivion before notes are replaced completely by electronics and plastic.

Peter

[Rangnath]

I'm usually reluctant to challenge you Peter, you know too darn much.
And besides, usually, as well as in this case, I agree with you. 
But cultural habits die slowly; otherwise why in the world wouldn't the USA have adopted metric yet?
As for dollar bills:
As you know, the US mint has produced a series of President Dollar coins.  We're almost two years, 8 presidents and millions of coins into the series and as of yet, I have not seen ONE coin in general circulation.
The Federal Government has issued advertisements extolling the benefits and cost savings of the metal coin over the paper note. The ad went so far as to say that using the coin in transactions was the patriotic thing to do! 
But that was a half a year ago and still no sign of the coin in the market place.  Perhaps the Feds should have made the link between using the dollar coin and support for the fight against international terrorism, reduction in teen pregnancy and elimination of abortion.
richie

[Figleaf]

I don't mean to be imposing Richie. Thanks for your reaction. In my previous contribution, I did mention political pressure. The round dollar problem is obviously caused by politics, not popular demand, since popular demand is irrelevant in this case. Allow me an example. In US military bases abroad, the 1 cent coin is no longer used. This saves the military a lot of money, since they don't have to ship the coins to al their outposts. The Robinson Crusoes in uniform complained for a short while, then accepted the situation. Yet, no politician dares to take the responsibility to discontinue the cent in the US. The lesson: reforming the currency needs authority.

The blindingly obvious way to get the round dollar accepted is by discontinuing the rectangular dollar. Rather than kick the paper habit by appealing to nationalism or its opposite, common sense, you starve the habit. No need to go cold turkey either. Banknotes have a life of a couple of weeks. Afterwards, dollar coins wil rule, except among the militia.

So why isn't it done? A little bird tells me the banknote paper suppliers are very well organized and conveniently located in a state whose senator, the brother of a popular ex-president, is using his influence to protect the home industry. This has nothing to do with said senator's liberal leaning; it's just political business as usual. No one else thinks the problem is important enough to stop him and everybody else knows the public would side with him on this. Therefore, the authority to introduce the dollar coin is lacking. The Mint is fighting a losing fight, so the powers that be are happy to let them fight. Alone.

Peter

[Rangnath]

The round dollar problem is obviously caused by politics

Isn’t it more “economics” than politics? I thought that the desire to switch by the Government was due to cost saving measures.

In US military bases abroad, the 1 cent coin is no longer used.

I had never heard that!  How interesting!

The blindingly obvious way to get the round dollar accepted is by discontinuing the rectangular dollar.

I agree.  But instead, the Feds offer advertisements based on wishful thinking. What a strange way to do business.

A little bird tells me the banknote paper suppliers are very well organized and conveniently located in a state whose senator, the brother of a popular ex-president, is using his influence to protect the home industry.

I thought paper money was printed in the District of Columbia (considered by some to be a colony as its citizens have no representation in Congress) and in Texas.  Come on Peter, tell me!  Which senator?  Ted Kennedy of Massachusetts?  Jeb Bush of Florida? 

richie

[Figleaf]

http://www.crane.com/navContentProduct.aspx?NavName=aboutus&DeptName=CurrencyPaper

http://www.google.nl/search?hl=nl&q=%22crane+paper%22+kennedy&btnG=Google+zoeken&meta=

Peter

[Rangnath]

Ah, Saint Ted, say it isn't so! 
richie

[lusomosa]

Greetings to all,

One more thing about this small coins question.
I travel every few months from The Netherlands back to Portugal ( my home country ) . Before the Euro it was a mess : I had Guilders in the Netherlands and a wallet with my escudos for in Portugal. As I live very close to Belgium and Germany I also had somewere at home Belgium francs and Marks just in case !!!! The difficult part was finding them when I needed it.
With the Euro all is much better now  ( I still have 2 wallets , but that's because my Portugueese ID card is to big for my duth wallet  ).
Still I alway have to adjust to the prices of the general costs like Coffie, food, cinemas & transportation. Read : cheap in Portugal and expensive in the Netherlands.
In Portugal you do get exchange in cents and I sometimes have to wait to get the one cent I'm still entitled to receive from a shop. I realized that after returning to the Netherlands I have my wallet full of small coins and that many weeks later my 1 and 2 cent coins still found in my wallet are Portugueese .
The opposite happens as well : in the Netherlands is normal to get from an automathic cash machine bank notes of 50 euros.  In Portugal on the other end the biggest bill you get in 20 euros.
Therefore on the first week or so of being in Portugal I have some difficulties on exchanging the 50 euro bills I bring from the Netherlands.
In short : small coins are less needed in richer coutries than on poorer ones even with the same currency. The opposite applies to bank notes.

LP

[Figleaf]

Same here. I just returned from Barcelona, taking the opportunity to offload almost 1 euro in ones and twos picked up in other member states. By contrast, it was sometimes difficult to use my Dutch debit card, though my French debit card was usually no problem. There was quite a lot (ranging fom Gaudi to Pata Negra) to compensate for this, though

Peter

[Figleaf]

Interestingly, the use of coins may be sensitive to the business cycle (though this may also be related to diminished use of credit cards):

Survey: More Americans using cash
Tuesday, November 25, 2008 - 11:24 AM CST

Twenty-three percent of Americans are using cash more often than they did a year ago, according to a survey by Coinstar Inc.

Consumers say they’re using cash to help manage household budgets and control credit card debt.

In addition, more than 60 percent of survey participants say the weak economy will cause them to change their spending plans for 2009.

According to the survey, 84 percent said they’ve opted to use cash to control spending. Another 69 percent said they are worried about credit card debt.

The Coinstar Survey was conducted Nov. 5-10 by Kelton Research.

Source: Birmingham Business Journal

[BC Numismatics]

Peter,
  There is also a debate in Canada to pull the 1c. coin from circulation.Canadians considered the $2 coin to be pretty strange when it was first issued,but they are now so used to it,now that there is no longer a $2 note in circulation.Between 1935 & 1987,Canadians were very used to seeing both $1 coins & $1 notes in circulation.This all changed in 1987,as the $1 note was pulled from circulation,& the Voyageur $1 coin was replaced by the Loonie,thanks to the dies for the 1987 Voyageur $1 coins disappearing in transit between both the Ottawa & Winnipeg branches of the Royal Canadian Mint.

Here in New Zealand,we took to the $1 & $2 coins pretty quickly,as we knew that the $1 & $2 notes were being pulled from circulation.

Aidan.

[chrisild]

In short : small coins are less needed in richer coutries than on poorer ones even with the same currency. The opposite applies to bank notes.

Don't know ... seems that in this regard "the" Germans are worse penny pinchers than "the" Dutch for example. Doing away with the 1 and 2 ct coins would make a lot of sense, I think. But try that in Germany. And coming to an agreement for all of Euroland would be impossible anyway ...

Christian